IIJ Announces First Six Months Financial Results For The Fiscal Year Ending March 31, 2017

TOKYO, Nov. 08, 2016 (GLOBE NEWSWIRE) -- Internet Initiative Japan Inc. ("IIJ") (NASDAQ:IIJI) (TSE:3774) today announced its consolidated financial results for the first six months of the fiscal year ending March 31, 2017 ("1H16", from April 1, 2016 to September 30, 2016). 1
Highlights of Financial Results for 1H16
Revenues JPY74,123 million (up 13.5% YoY)
Operating Income  JPY1,948 million (down 24.0% YoY)
Net Income attributable to IIJ  JPY1,108 million (down 33.0% YoY)

Overview of 1H16 Financial Results and Business Outlook

"As announced on November 4 th, we have revised down our financial targets for the fiscal year ending March 31, 2017, principally because our aggressive business investments and services developments have been taking longer than expected to start contributing to revenues accumulation. The revised annual revenue is JPY158.0 billion, JPY1.0 billion down from our initial target of JPY159.0 billion. The revised operating income is JPY5.0 billion, JPY2.3 billion down from our initial target of JPY7.3 billion," said Eijiro Katsu, COO and President of IIJ.

"As we expect great market opportunities in the middle term with more advanced cloud usage, IoT type of network systems adoption and greater demand for security by many Japanese entities, consumer mobile service's market explosion and so on, we've been making proactive business investments including the commencement of "IIJ GIO Infrastructure P2" and "IIJ Omnibus Services" 2 later last year. We're also engaged in IoT service development 3, continuous enhancement of security services 4 and preparation for Full-MVNO 5. As for IoT, we're going to launch "IIJ IoT Service" which offers functions such as network, cloud and devise control elements required for IoT systems. With these required components, we've received several orders from local governments very large-scale multiple-year projects in which cloud, security, system and network are mostly outsourced and we expect recurring revenue growth should become strong the next year with these kinds of full-outsourcing trend," said Katsu.

"In this first half, we continued to have strong year over year revenue growth rate of 13.5%. On the other hand, in addition to the current relatively high level of increasing costs due to the implementation of business expansion strategy, we saw SI gross margin deterioration as an additional factor impacting our operating income. The low SI gross margin was temporarily, we believe, by combination of factors such as low productivity of systems engineers, 6 temporal profit deterioration due to the delay in offering some functions of our foreign exchange system ASP service, low profitability in a certain construction project, and weaker than expected systems operation and maintenance revenue with the cancellation of certain relatively large projects from 1Q16. Although 1H16 total revenues slightly exceeded our initial target, we missed the operating income target and it decreased by 24.0% from 1H15," continued Katsu.

"For the remaining half, we expect low productivity of systems engineers to improve based on the current SI projects situation. However, based on the current services order accumulation, we'd miss the revenue targets of new services such as "IIJ GIO Infrastructure P2" and "IIJ Omnibus Services" which should increase but not as strongly as our initial expectation. Since the depreciation for these new services have already begun, the revenue gap will directly impact our operating income. Because Japanese companies are conservative with their systems, especially with larger and mission-critical ones, the lead time, including clients' internal judgments and preparation, takes longer than expected. And, some delays of our services developments would have some impacts as well. Another issue that would impact our operating income against our initial expectation is the cost related to mobile services. We increased leasing MVNO bandwidth largely during 2Q16 along with increasing traffic trend; therefore, this recurring type cost for MVNO infrastructure would exceed our initial expectation in 2H16. Although the excessive cost is not expected to become larger in 2H16 and the mobile services' gross margin amount is expected to increase year over year, it would continue to impact our network services' gross margin against our initial expectation. Regarding the details about our revision, please refer to our press release titled "IIJ Revises its First Half and Full-Year Financial Targets for FY2016," said Katsu. 7

"The income level for this fiscal year is to be weak. However, we believe our recent business developments for future sustainable growth should contribute to stronger revenue growth for the middle term which should ultimately lead to income growth. It's inevitable that the role of IIJ to be larger and more critical along with the progression of IT usage such as IoT and BigData. We believe we'd be able to return to operating income growth the next fiscal year because SI deterioration is expected to be temporary, costs and revenues time-gap for new services would be diminished by the continuous revenue accumulation and mobile profitability to improve by gathering many more diversified mobile traffic 8. Although the operating income is expected to be 1 or 1.5 years delayed from what we initially expected at the beginning of this fiscal year, we believe strong revenue would generate continuous operating margin improvement. Therefore, we decided the dividend targets to remain unchanged (annual dividend of JPY27.00 per share) and to implement share buyback of JPY1.5 billion," concluded Koichi Suzuki, Founder, CEO and Chairman of IIJ.

1 Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with U.S. GAAP. All financial figures are unaudited and consolidated.

2 "IIJ GIO Infrastructure P2" launched in November 2015 is our new cloud service platform to promote Japanese enterprises demand to migrate their core business platform to cloud. "IIJ Omnibus Service" launched in September 2015 incorporates SDN and NFV technologies, automatically offers several network elements. For details please refer to our pree releases titled "IIJ to Launch 'IIJ GIO Infrastructure P2' - A Next-generation Cloud Service" at http://www.iij.ad.jp/en/news/pressrelease/2015/0714.html and "IIJ to Launch 'IIJ Omnibus Service' - A New generation of Cloud Networking Services" at http://www.iij.ad.jp/en/news/pressrelease/2015/0715.html

3 "IIJ IoT Service" will be launched in November. For detail, please refer to our press release titled "IIJ to Launch the IIJ IoT Service, a New IoT Platform that Combines Networks with the Cloud" which can be found at http://www.iij.ad.jp/en/news/pressrelease/2016/0719.html

4 For example, we have launched consultation service to help companies implement CSIRT (Computer Security Incident Response Team) and expanded functions for our email security gateway service, recently.

5 For detail, please refer to our press release titled "IIJ Begins to Engage in a Full MVNO for Enhanced MVNO Business" which can be found at http://www.iij.ad.jp/en/news/pressrelease/2016/0830.html. Related FAQ is available at http://www.iij.ad.jp/en/ir/news/2016/pdf/20160830_fullMVNO_E.pdf

6 We had low productivity of systems engineers mainly because 1) of the projects already recognized as revenue in FY2015 (1Q16), 2) we assigned system engineers to handle several large projects while others were postponed (2Q16) , and 3) some prospective orders including cloud-related systems required pre-sales activities conducted by engineers (2Q16).

7 Please refer to our press release titled "IIJ Revises its First Half and Full-Year Financial Targets for FY2016."

8 As we purchase mobile network from NTT Docomo on the unit of bandwidth, once we gather various types of mobile traffic that should lead to improved utilization of network and thus profitability.

1H16 Financial Results Summary
Operating Results Summary
  1H15 1H16 YoY Change
  JPY millions JPY millions %
Total revenues 65,334 74,123   13.5  
Network services 38,000 44,836   18.0  
Systems integration (SI) 23,725 25,768   8.6  
Equipment sales 1,638 1,467   (10.5 )
ATM operation business 1,971 2,052   4.2  
Total costs 53,626 62,275   16.1  
Network services 30,501 36,715   20.4  
Systems integration (SI) 20,341 22,993   13.0  
Equipment sales 1,480 1,343   (9.3 )
ATM operation business 1,304 1,224   (6.2 )
Total gross margin 11,708 11,848   1.2  
Network services 7,498 8,120   8.3  
Systems integration (SI) 3,385 2,775   (18.0 )
Equipment sales 158 124   (21.8 )
ATM operation business 667 829   24.4  
SG&A expenses and R&D 9,145 9,900   8.3  
Operating income 2,563 1,948   (24.0 )
Income before income tax expense 2,647 2,105   (20.5 )
Net income attributable to IIJ 1,652 1,108   (33.0 )

Segment Results Summary
  1H15 1H16
  JPY millions JPY millions
Total revenues   65,334     74,123  
Network services and SI business   63,557     72,257  
ATM operation business   1,971     2,052  
Elimination   (194 )   (186 )
Operating income   2,563     1,948  
Network service and SI business   2,056     1,281  
ATM operation business   576     734  
Elimination   (69 )   (67 )

We have omitted segment analysis because most of our revenues are dominated by network services and systems integration (SI) business.

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